Making the most of your Personal Savings Allowance

Wed 18 Mar 2015

The introduction of the Personal Savings Allowance from April 2016 effectively abolishes tax on savings for 95% of taxpayers.  Both basic and higher rate taxpayers will be able to benefit although higher rate taxpayers will only be able to benefit from half an allowance.

The Chancellor announced in the Budget that from April 2016 basic rate taxpayers will be entitled to a Personal Savings Allowance of £1,000 with a reduced allowance of £500 applying to higher rate taxpayers.

In the 2014 Budget it was announced that if your income was less than £15,600 then there would be no tax to pay on interest thanks to a starting rate band at a zero tax rate.  So, from April 2016, when you combine the personal allowance, the starting rate band and the new Personal Savings Allowance a taxpayer could receive £16,800 a year without paying any income tax.

The introduction of this relief as an allowance means that someone who earns £70,000 a year and receives £500 bank interest will not pay any tax on their interest whereas a pensioner with £20,000 income each year from pensions and £1,500 of interest on savings will be taxable on the top £500 of their interest income.

In either case the new allowance must be welcome – it is anticipated that 95% of taxpayers with such modest income from bank and building society interest will no longer pay tax on their interest.  Consequently the 20% withholding tax from interest will also be scrapped in April 2016.

For more information please contact:
Janet Pilborough-Skinner or Paul Barham